Answer to Question #143340 in Economics for Jade

Question

Explain the role of mortgage backed securities, ninja borrowers and lenient government regulation in causing the mortgage/financial crisis of 2007-2009. 

Answer 1

Securitization, specifically the packaging of mortgage debt into bond-like financial instruments, was a key driver of the 2007-08 global financial crisis. Securitization fueled excessive risk-taking that brought many major financial institutions on Wall Street and around the world to their knees when the U.S. real estate bubble burst.

A NINJA ("no income, no job, and no assets") loan is a slang term for a loan extended to a borrower with little or no attempt by the lender to verify the applicant's ability to repay.

NINJA loans were more common prior to the 2008 financial crisis, they were one more reason for that crisis to appear.

The third reason for that financial crisis was deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. When the values of the derivatives crumbled, banks stopped lending to each other which strengthened the financial crisis.